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Flashcards in 4.7 The Role Of International Debt Deck (19)
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What is foreign debt?

Refers to loans of a country that need to be repaid to overseas lenders as the World Bank and the IMF.


What are internal debts?

The money owed by a country to domestic lenders such as private banks because the government has a budget deficit (government expenditure exceed government revenues.)


What is external debt?

Money owed to foreign creditors (lenders).


What are creditors?

Financial institutions that lend money to others foreign creditors include commercial banks, foreign governments and international financial institutions such as the world banks and the IMF.


How are debts incurred?

Can be incurred by private individuals, firms or the government. Foreign debts are often incurred by countries with weak institutions including the domestic monetary system and poor infrastructure, forcing them to borrow from foreign creditors to develop their economies.


Why is foreign debt an issue for LEDCs?

Because the burden of interest payments and strict loan terms have often resulted in huge opportunity costs.


Why are LEDCs often heavily indebted?

Because high interest and/or domestic inflation reduce the value of their currency (foreign debts have to be repaid in foreign currencies). This makes their debt financing increasingly unsustainable.


Where can the problem of foreign debt be traced back to?

The global oil crisis of 1973 when oil prices increased by 500% due to the Arab Israeli war this created a huge surplus of profit for exporters of oil, deposited in banks, with the money being lent to LEDCs. The subsequent oil crisis of 1979 caused a worldwide recession with LEDCs unable to export enough of their commodities to pay off their debts. Many LEDCs defaulted on their loans.


What is the problem with foreign debt?

Can cause both economic and social instability. Ultimately high levels of foreign debts can make LEDCs even poorer.


What is a heavily indebted poor country (HIPC)?

A low income nation with a huge outstanding debt, making it eligible for special financial assistance from the IMF and the world bank.


What has happened to countries that have become so heavily indebted?

They have had to reschedule their debt repayments to banks and other lenders. Debt rescheduling means lengthening the time it takes to repay the loans, often leasing to further borrowing and escalating debts.


What issues do HIPCs suffer from?

Highly vulnerable to external shocks, which add to their soaring debts.
Suffer from debt overhang where their are existing debts are so unaffordable that they find it extremely difficult to borrow more money. Debts incurred by some HIPCs exceed government revenues from taxpayers, thus causing a debt trap where they are unable to ever repay their debts.


What occurs if the HIPCs fails to repay their foreign debts?

Has caused perpetual debts to occur where they take out subsequent loans to pay for existing debts. This reduces their financial status thus making future foreign investment in these countries less attractive. In man cases LEDCs incur huge debts because loans and financial aid are misused by corrupt leaders.


What has the large amount of debt led to in the HIPCs?

International pressures for creditors to cancel the debts (debt forgiveness) in an attempt to restart or improve the economic development of HIPCs. However this could cause some HIPCs to come complacent as they are protect form their irresponsible behaviour so may continue to be careless in the future.


How can conditional assistance be given to HIPCs?

Debt relied framed in the condition that HIPCs meet a range of targets for structural changes such as poverty reduction programmes. Debt relief includes both aortic and complete debt forgiveness for HIPCs.


How is rescheduling of debt and conditional assistance facilitated?

By international financial institutions such as the world bank and the IMF. Both these organisation have key roles in resolving the international debt problems of LEDCs and HIPCs.


What is the role of the international monetary fund?

IMF acts as an international lender of last resort to coteries with urgent or major balance of payment problems. If a country is expected to default on its loans the IMF can intervene using conditional assistance.


What is the role of the world bank?

An international finance organisation concerned with lending money on a long term basis to LEDCs to assist in their economic development.


What are the problems for balance of payments for the indebted countries caused by servicing of international debt?

Many LEDCs have a high debt service ratio (the ratio of foreign debt including interest repayments to its export earnings). This means that they need to generate more export earrings to and their foreign debts. A low debt service ratio suggests a healthier financial position.
HIPCs import far less than their populations need from MEDCs as there is a long term decline in the real value of their own exports and their currencies. Some HIPCs spend more money on debt financing than they spend on education or healthcare.
There is less of an incentive for direct investment in highly indebted countries this has a negative impact on the financial account of the balance of payments of such coteries.
Portfolio investment in highly indebted countries is also likely to fall again having a negative impact on the financial account.